How To Afford To Buy a House on Low Income
Updated: Mar 8, 2022
Part of the "American Dream" is to own your home, but the reality is that for people with low income, bad credit or history of evictions, this might seem impossible. Yes, eviction affects buying a house; however, it won’t stop you from buying a home. There are also home buyers who are able to get a home loan without a job. It's all about the right course of action. Low income house buying is possible but achieving this goal can be an ongoing financial difficulty. In this guide you would learn that with the right steps and knowledge, you can achieve the dream of owning your home. If you earn $12 or more an hour, this guide will help you make your home buying dream a reality!
The steps for buying a house on low income:
Save Money (how much to save to buy a house? as much as you can).
Improve your background and credit record (it's easier than you think).
Build stable income (remain at your job).
Apply for a mortgage.
Buy a house!
If you follow the steps above, in 3 years (5 years is better), you will be able to buy an affordable home. You would probably be able to pay lower housing payments than your current rent. In the meantime, you can rent second chance housing to save money every month.
You need to understand how financing a house works and it's not much different than buying a car (without getting into transferring ownership of real estate). You start by applying for a mortgage, aka a loan, get approved for a certain amount, and then you search for a home you can afford to buy. The approval of the mortgage and the amount you qualify for will be based on several factors. Basically, the lender estimates the risk for a default on the loan. The approval factors, among others, include employment stability, your saved money as percentage of the house cost, and your income amount (which is your ability to make monthly payments). Because the lender evaluates your risk, your credit and background come into play as well. If you have eviction and/or collection, it doesn't mean you will be denied, it's just means that your starting point is more challenging. It could take 3 years to build a substantial amount of cash to put down, 3 years of remaining in the same workplace to show steady income and 3 years without new collection and eviction to show that you are trying to do your best. To buy a house with low income the first step will be to save money for it - saving for a house on a low income is possible and you should do it.
What Mortgage Payments can I Afford?
The first step to determining your affordability is to calculate what you can pay on a mortgage.
Take your income (monthly), your expenses (insurance, loans, etc.), and your general living costs (groceries, utilities, etc.). Based on the finances you have leftover for the month, determine how much you can use towards savings.
A general rule of affordability is to save at least 3 months of future housing payments or the amount you have dedicated to a home loan each month. With a backup savings pocket, you can rest assured that you can continue to cover your mortgage payments should an unexpected event occur.
Let's assume that you’re making $12 an hour which is about $1,600 net income. You should spend no more than $500 a month on rent or a mortgage payment. So, if you can save $8,000 to put down (and you can with 3 years of tax returns), you would be able to buy a house worth $70,000 with 4.5% interest. That calculation ends up to only $495 a month on housing payment.
Setting Your First Financial Goal to Buy a Home
As an example, we will set the goal to save $15,000 in five years. This means you need to put at least $3,000 in reserve to achieve this sum.
Once you deduct your monthly essentials and frivolous expenses, what you are left with may seem futile when looking at purchasing a home. However, if you can work towards saving at least $3000 annually you will be surprised at what you can do to get approved for the desired mortgage.
Dedication, Accountability, and a Plan
Start by saving your tax return for the next 5 years that totals $3,000. If your earnings are greater, you can add this to the monthly saving.
If you have completed your tax return and you earn less than $3,000, it is a good idea to divide the remaining balance across your pay periods for the year and make deposits into your savings. The purpose is to get into the habit of smart savings and financial planning. Stick to the plan!
Consider this scenario, if you do not purchase a costly TV, a new car, or a want (not a need), then you are left with more money to build your savings plan and create a down payment on a home. This means that in five years you would have your $15,000 we talked about before. The $15,000 you save will be your down payment for your home, and with this amount your monthly payment on a $70,000 house will be as low as $420. This is lower than most affordable homes to rent.
Why Set the Goal of Purchasing a Home at $15,000?
If you have bad credit, evictions, and collections in your past, your interest could be 4.5% which means a down payment of 20%. However, if your credit is fair and you are 25 years old, by the time you turn 30 you can buy a house making less than $20,000 a year.
If you are at the age 30 and have $15,000 available for a down-payment, you need to look at the cost of housing.
For those who are making $12 an hour, your monthly mortgage should not exceed $415 including taxes and insurance. When we add a 4% interest with a 20% down payment, including the value of the home that you can cover, we're left with a total of $90,000.
If you choose a cheaper home value of approximately $50,000 with a $15,000 down payment, your rent will average $200 per month. Sounds good right! And that’s based on $12 an hour earnings. If you make more, you can buy a more expensive house.
It All Comes Down to Saving Your Tax Return
Saving your tax returns is vital to helping you buy a home on low income. It means that within 5 years of apartment renting, you may afford to purchase a house with a mortgage that would end up less than your monthly apartment rent!
It is a simple process with a simple return. No gimmicks or hidden terms. If you are disciplined enough to save your tax return and focus on your financial goals, you can find yourself signing the transfer papers to homeownership.
For those who end up making below $3000 in a tax return income, you have the option to extend the years for saving towards a mortgage or you can add to the balance with your weekly or monthly wage to compensate for the difference.
Can I Afford a Home with an FHA Loan?
For most property purchases and the approval of a mortgage, you need a down payment of at least 20%. For a smaller down payment of around 3.5%, you could qualify for an FHA loan.
The FHA loan is ideal for those with a less than favorable credit score. Because its qualifying terms are not as strict as a conventional home loan, it is available to those with a negative credit history.
What Happens in My Retirement?
If you retire and receive a total of $750 in Social Security income, you will not have to use this to pay rent if your house is paid in full. This means that the $750 received can go towards other expenses, investments, and even property upgrades.
It Starts with a Plan
It is time to take the initiative and to plan our lives better. We can achieve the goal of the “American Dream” and own our very own property, but it takes time, and it takes dedication.
If you earn $12-$16 monthly and wish to purchase a home, do not allow the time or the sacrifice to deter you from reaching your purpose. With some planning, or should I rather say, with a structured plan, you can own your very own property. Yes it's possible to to afford a house making $12 an hour so if you make $20 an hour buying a house should be even easier.
The purpose of our guide is to assist in determining just how much you should save to make a sound and rewarding investment. The amount you save each week or each month will depend on your earnings, your expenses, and the period in which you need to afford mortgage approval and a down payment.
With low income or bad credit, it is certainly not impossible to purchase a home. Remember to focus on yourself and what you can afford. If you struggle to cope with debts and finances, you can also consult with a professional financial advisor to make the most of your earnings while reducing debts.